Let's dial in the ratio of the HUI Gold Bugs index vs. the S&P 500 that we have been reviewing from a monthly 'big picture' perspective. This weekly chart is also a big picture, but it adds the 250 week moving average and weekly MACD, along with its slower brother, TRIX, for more definition.
People should realize that while there is significant reason for fundamental optimism about quality companies within the gold stock sector this is, on a pound for pound basis, one of the most aggressively hyped stock sectors on the planet. The same can be said for gold itself.
Why is this? I believe it stems from a core and righteous belief by many gold bugs that things are not right with the system (thanks Captain Obvious :-)), gold should be money again (or at least it should anchor the paper of the modern realm) and it is simply a matter of time before destiny is achieved.
Gold, while in a predictable phase of under performance due to the Euro relief and US earnings and temporary 'jobs' pumps, has been beaten back from its impulsive highs during the acute phase of the Euro crisis. Hype took gold up, and hype is taking it down or more accurately, is causing it to under perform what is now being hyped; namely the salvation of the system as we know it and the ever present tout of conventional stocks.
One of the phenomena that behavioral economists and psychologists have identified as being part of our decision making process is happening now. The perils of complexity refers to the phenomena where the more complex a decision the more we fall back on simplistic solutions.
In the case of Greece, the number of variables, parties involved and lack of precedents has resulted in the market saying in effect " This is too hard to figure out so I'm just going to wait until it is easier to quantify, then I'll re-price the risk"
Meanwhile Germany is exhibiting the classic signs of an employer who really wants an employee to quit, but doesn't want to pay severance. Over the last few weeks Germany has progressively increased the cost to Greece of staying in the EU by introducing tougher conditionality for any release of funds. Germany wants Greece to leave so that it can redeploy the funds where it is less likely to be a money sinkhole. But they want the process to be sufficiently drawn out that the market has time to adjust. In this regard they are mostly succeeding. We now have Dutch EU Commissioners openly talking about Greece leaving the EU and the market doesn't even blink.
However the market has not priced in the risk because it is too complex. If Greece leaves, as I now think they will, there will be a re-pricing of risk. It will not be a Lehman event, but it should be the catalyst for at least a modest (2-5 %) correction.
I am a middle-aged man, but in the years I have lived, I have at least amassed enough wisdom to know intuitively that I am still naive. We're always learning and, hopefully, getting wiser, so in an absolute sense, I'll die a naive man.
But I'm not as dim as I was as a teenaged-Tim, so allow me to start this essay with a couple of background facts.
This is a snippet from NFTRH172 focusing on the writer's methods of viewing markets from a visual and psychological perspective. I just want readers to continually think about herds and about what it takes to be able to get contrary these herds at the appropriate times. NFTRH172 then proceeds on to actual intensive analysis of the precious metals sector and the macro market backdrop.
I had an interesting discussion with a friend the other day when he asked me if I spent anytime on Facebook. I answered that I didn't "do" Facebook since I was too busy. (There are a host of other reasons of course, but that's another topic).
I asked him why he Facebooked and he suggested that he did it to keep in touch with people and to network a bit. I told him that I had read an article recently that had stated that research is beginning to show that Facebook makes people depressed. To my surprise, he totally agreed.
At the open today we're sure there were a lot of folks who were not in the market going RUT ROH the market is taking off without me! I better get in!.
Then there were the people who are short the market saying RUT ROH! I'm short and the market is taking off I better get out before I get taken to the cleaners!
What do each of these have in common? FEAR! Plain and simple FEAR.
To those not long looking to get in? It was all about FEAR of missing it AFTER they already missed it.
To those short wanting to get out? It was all about FEAR of losing more AFTER the market already made a run.
So what else do they BOTH have in common? Simple, its called EMOTIONAL EXTREMES and more often than not they mark key turning points.
If you're like most Americans, you hadn't heard of James Stockdale until he showed up for the 1992 Vice Presidential debates and made this famous line:
Afterwards, he became the butt of jokes and was basically portrayed as a dottering old man. He and Ross Perot captured nearly 20% of the vote, in spite of being a third party ticket, and the nation soon stopped talking about Admiral Stockdale.
I hadn't thought of him for years, but last night I happened to trip across an article about the man, and I was amazed. He suffered through unspeakable horrors as a prisoner of war and, in all that time, he showed strength, resolve, and character that I imagine 99.9999% of the population lack. The guy had brass balls, pure and simple, and he was awarded the Medal of Honor for his courage.
Read on:
Stockdale was held as a prisoner of war in the Hoa Lo prison for the next seven years. Locked in leg irons in a bath stall, he was routinely tortured and beaten. When told by his captors that he was to be paraded in public, Stockdale slit his scalp with a razor to purposely disfigure himself so that his captors could not use him as propaganda. When they covered his head with a hat, he beat himself with a stool until his face was swollen beyond recognition. When Stockdale was discovered with information that could implicate his friends' "black activities", he slit his wrists so they could not torture him into confession.
One can only imagine fellow VP-debate-participant Dan Quayle's behavior in such a circumstance. Once they mussed his hair, it would probably be all over. To continue:
Stockdale was part of a group of about eleven prisoners known as the "Alcatraz Gang": George Thomas Coker, George McKnight, Jeremiah Denton, Harry Jenkins, Sam Johnson, James Mulligan, Howard Rutledge, Robert Shumaker, Ronald Storz and Nels Tanner; which was separated from other captives and placed in solitary confinement for their leadership in resisting their captors. "Alcatraz" was a special facility in a courtyard behind the North Vietnamese Ministry of National Defense, located about one mile away from Hoa Lo Prison. In Alcatraz, each of the eleven men were kept in solitary confinement in cells measuring 3 feet by 9 feet with a light bulb which was kept on around the clock. The men were locked in leg irons each night
What amazed me the most is what Stockdale said in reflection:
"I never lost faith in the end of the story, I never doubted not only that I would get out, but also that I would prevail in the end and turn the experience into the defining event of my life, which, in retrospect, I would not trade."
Now here's the important part......when asked about who died during captivity, he replied:
"Oh, that's easy, the optimists. Oh, they were the ones who said, 'We're going to be out by Christmas.' And Christmas would come, and Christmas would go. Then they'd say, 'We're going to be out by Easter.' And Easter would come, and Easter would go. And then Thanksgiving, and then it would be Christmas again. And they died of a broken heart."
And then, finally, the most important part of all, which you might want to read ten times to yourself:
"This is a very important lesson. You must never confuse faith that you will prevail in the end—which you can never afford to lose—with the discipline to confront the most brutal facts of your current reality, whatever they might be."
I hope the departed Admiral will forgive me for using his words as an inspiration for traders - - or anyone undergoing a challenge - - but these are some of the most inspiring words I've ever read.
Thank you, Admiral Stockdale, for everything you did. I promise that those old jokes tossed around in the 1990s about you are no longer funny anymore. You were a great man.
Oh, and just to add icing to the cake. His name was James Bond Stockdale.
